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If you’ve delved into the FIRE community even slightly, you’re probably already familiar with the shrine that is Vanguard. The Vanguard Group is an investment/brokerage firm out of Pennsylvania that manages over $4 trillion in assets.
Eh, who cares? All the big brokerages manage big dollar assets like that.
True, but Vanguard’s different from the other firms out there in that Vanguard is structured as a mutual company.
What that means is that it’s a private company where the owners are actually the clients themselves. In other words, if you’re a Vanguard customer, you’re also a part owner of the company.
That’s part of the reason people love this company. This isn’t to say that the other big brokerages don’t have your interests in mind.
However, with the exception of Fidelity (which is privately owned), the other “big-boy” companies have to put their shareholder interests front and center as well.
The Birth of Index Funds
Although the idea of index funds came about in the 60’s, John Bogle is credited with creating the first index fund that individuals could invest in.
Bogle founded the Vanguard Group in 1974 and created the First Index Investment Trust on December 31, 1975.
If you’re not familiar with index funds, the idea is fairly straightforward. Index funds buy and sell groups of stocks by following a set of rules. Those rules might be for tax optimization or maybe socially good companies, for example.
However, the index funds most of us know of are the ones that follow a particular stock market index. They might track the S&P 500 or the Dow Jones Industrial Average, for example.
Investment firms and even a lot of investors generally do not look very highly upon these funds with their reasoning being average returns. However, between the higher-costs and the mistakes stock-pickers tend to make in actively managed funds, those average returns often turn out to be greater with index funds.
Because index funds are automated to track a stock index, they don’t have the overhead of “professionals” needing to manage them. That keeps the cost of them down – big time. And that cost can be a dramatic drag on your portfolio.
The other great thing about index funds is that you’re spreading your risk across possibly hundreds or thousands of stocks instead of having all your eggs in one basket. That also means you don’t have to spend all your time analyzing different stocks.
Much to the disdain of the financial industry, index funds are becoming more popular than ever.
Well Hello, Vanguard Funds!
When I opened my Roth IRA back in 2005, I needed a place to open my account. I just picked an institution that sounded good because I wasn’t well versed in what I was doing back then.
At that time, it was Ameritrade (before they became TD Ameritrade). Before we continue on, know that I haven’t had any major issues with them over the past 12 years.
In fact, since that time, I opened a taxable account with them and a then Roth IRA for my wife.
So why make the move?
Well, over the past few years, I’ve continued to learn (haven’t we all?!). Although I’ve had a couple lucky guesses on a few stock picks (I’m talking to you Amazon and Google!), I realized that this wasn’t the smartest play.
These so-called “index funds” seemed a much smarter way to go. Of these funds, the prize of the wild seemed to be Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).
You get the stock diversity in that it tracks the market as a whole and has an expense ratio of just 0.04% (as of 04/27/2017). That’s incredible!
And if you think expense ratios don’t make a big difference in your portfolio, I would recommend signing up for a free account at Personal Capital and checking out the Retirement Fee Analyzer. I changed my investments around after seeing this and that should save me over $50,000 in fees alone over a ten-year period.
That’s astounding to me! If you don’t already have an account, take a few minutes and make that happen.
So yes, 0.04% is fantastic and I wanted in. Only Vanguard can sell VTSAX as a mutual fund though. However, Ameritrade can sell the equivalent ETF, which is the Vanguard Total Stock Market ETF (VTI).
I wasn’t thrilled with the idea until I found that TD Ameritrade had a special program that allowed you to buy many low-cost ETFs commission-free… and VTI was on the list.
So, I slowly started moving a good chunk of our portfolios to VTI.
The TD Ameritrade Swindle
In the meantime, I thought to myself, “Hey self, why don’t you just move everything to Vanguard and get rid of Ameritrade altogether?” Sometimes I’m smart like that.
So I made a call to Ameritrade and they let me know that wouldn’t be a problem but they charge $75 to transfer your account out. Um, so you guys are those jerks that charge a buck to close an account just because you can, huh?
Ok, so you’ll make a couple hundred bucks on me closing my accounts, but is it worth it when I tell friends and family to go elsewhere so they don’t get trapped at TD Ameritrade as well?
That initially stopped me from doing the transfer and I even thought about just leaving $1 in each account and transferring the rest to dodge the fee, but you know what – screw ’em. I would rather pay it and be done with ’em rather than remain a hostage. Reminds me so much of one of my favorite scenes from “A Bronx Tale” (don’t play this if foul language offends you!)…
Besides that, I like the idea of being with a company where I wouldn’t have to worry as much about some hidden fees being slipped in somewhere. I can’t say I have that same confidence in Ameritrade.
The Route to Retire Swindle
Mrs. R2R left her job a couple months ago and started working for herself.
Because of that, we had her 401(k) plan hanging out there… and that’s when I got a little smarter.
TD Ameritrade offered a $300 bonus to roll over your 401(k) into an IRA there. Hmm, interesting.
After the wheels started turning, I opened an account and rolled her account into an IRA there.
Seems counter-intuitive to open yet another Ameritrade account, right?
Maybe, but we got our $300 and we’re now in the process of moving it right back out and over to Vanguard along with our other accounts.
So, their $300 bonus will cover the cost of moving all four of our accounts over ($75 x 4).
Maybe it was a little more work on my end, but it still feels like a win to me!
A Pain the Butt
I’ve never changed brokerages before, but here’s what I’ve learned so far… it’s a pain in the @#$! It’s easy to open an account at Vanguard – as I’m sure it is with other institutions.
The hard part comes with the transfer though. Plenty of paperwork to fill out (probably also the same everywhere).
But then you need to sign it. This may or may not be the same with all brokerages, but Vanguard requires you to sign it at a financial institution that participates in the medallion signature guarantee program.
Never heard of it?
Me neither. If you’re familiar with a notary, you know that their job is just to witness you sign a document. They don’t really care what it is – all they care about is seeing you sign the doc.
Well, the medallion signature guarantee adds a little more to that. First of all, had to find one that provides this service and not all banks or credit unions do.
Once there, the guarantor needed to understand the documentation to ensure you fill everything out correctly. This is because they are accepting liability for forgeries. This adds a little bit of time (not too bad, but still longer than just notarizing a document).
Then you mail everything into Vanguard and wait. And wait. And wait.
I’ve just finished one account transfer so far and the whole process took a good two to three weeks.
Not the end of the world, but still a pain in the butt considering we live in an electronic world! One down, three to go!
Just in Time!
So how funny is this? As I’m in the middle of writing this post, I get an email from TD Ameritrade…
Dear Valued Client,
We’re happy to announce that we are expanding our commission-free exchange-traded funds (ETFs) trading program, nearly tripling the number of available funds to 296. Since you’re currently enrolled in the commission-free ETF trading program, we want to be sure you have all the details so you can determine how these changes can meet your investing needs.
Anytime a big corporation is happy to announce something, you should already know you’re probably about to get screwed.
Such is the case here. As the email goes on, I learned that they are eliminating all Vanguard ETFs from their list of commission-free trades.
The change takes place on November 21, 2017, so I’m getting my accounts out just in time!
See ya later TD Ameritrade – hello, Vanguard!!
Who’s your brokerage? Do you love ’em or hate ’em?
Thanks for reading!!